Re-Examining the South African Reserve Bank’s Policy Reaction Function Using the NARDL Model

The 3–6% inflation target is a policy rule used by the South African Reserve Bank (SARB) to fulfil its statutory obligation of ensuring a low and stable inflation environment. Its policy reaction function assesses how the Reserve Bank responds to deviations of inflation from its target. This study relies on nonlinear autoregressive distributed lag (NARDL) models to estimate the asymmetric preferences of the Reserve Bank regarding inflation deviations during rising and falling inflation episodes. Using quarterly data spanning from 2002 Q1 to 2021 Q4, the study estimates policy reaction functions based on seven disaggregated measures of inflation to capture heterogeneity in the formation of price expectations. As a robustness exercise, the data are further divided into two sub-periods corresponding to the pre-crisis and post-crisis eras. Overall, the findings indicate that, in the post-crisis era, the SARB (i) has become more responsive to inflation, output fluctuations, and exchange rates, and (ii) has responded more aggressively to rising inflation than to falling inflation.